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Investor Relations

Entry into soluble coffee: more than a one-step adjacency

Vivek Verma, Managing Director & CEO, Coffee and Asset Management

Most of us can identify with the coffee shop culture and single serves – its rise over the past 2 decades now makes coffee in every form almost ubiquitous in the places we work and live. Despite world demand growing only at 1.3% over the last decade, rapid growth has been witnessed across certain segments within the broader picture.

Coffee producing countries, such as Brazil and Indonesia, are consuming 43 million bags (2.6 million MT) or 30% of the total world consumption of 143 million bags (8.6 million MT). Their consumption has grown by almost 40% from 31 million bags in 2005. Asia (excluding Japan) and the Middle East are experiencing a 3-6% growth in consumption as compared to developed markets growth at only 0.3%. Product wise, consumption of soluble coffee is rising at a rate of 4% per annum while specialty coffee is growing at a clip of over 10% a year, most notably in the US.

The fact that the world needs to produce more coffee to satisfy demand has underpinned Olam’s strategy of integrating our presence in the coffee supply chain. We have moved into upstream activity, setting up our own coffee estates to produce coffee on a traceable and sustainable basis. Within our core supply chain operations, we created a specialty coffee division that capitalises on our procurement and marketing expertise to help roasters find exceptional, certified coffees. We see a growing fit between our upstream presence and the specialty coffee marketing.

We also moved downstream into soluble coffee to cater to the rising demand we see in emerging Asia and Central/Eastern Europe. The rationale was straightforward. Our entry into soluble coffee in 2007 was not only a one-step adjacency into a higher value-added activity where there is a sharing of customers, costs and channels, we were moving into a space that is equivalent to one-third of the profit pool in the bean supply chain.

More importantly, we are extracting the full potential value from our capabilities in Robustas, the key ingredient in instant coffee, and scaling up where we have been able to differentiate our offering. As a strong player with origin presence in key producing countries across Asia, Africa and South America, we have a substantial market share, especially in the lower grade segment within Robustas, which is the core raw material for making spray-dried soluble coffee. That gives us an inherent competitive advantage.

Today, Olam’s share amongst independent suppliers of soluble coffee has grown on the basis of our enlarged capacity, as the market for independent suppliers has also grown. Private labels and the food service segment continue to be the growth drivers for us due to a large concentration of private labels in Europe while those in developing economies are growing at a healthy rate of 6% each year. We are therefore well-positioned to capture growth from our configuration of assets, incorporating excellent locations, efficiency and product development.